The tangible property regulations (TPRs) present one of the most significant changes to tax law in more than 25 years. Because the majority of taxpayers did not âearly adoptâ the TPRs, a great deal of anticipation occurred leading into the 2015 tax-filing season, as all taxpayers were required to comply with the TPRs as part of their 2014 tax return.
In February 2015, the IRS released Revenue Procedure 2015-20, which waived the requirement for small businesses (defined as taxpayers with total assets of $10 million or less, or average annual gross receipts of $10 million or less) to complete and file a Form 3115, Application for Change in Accounting Method. Although this simplification is a big relief for those small businesses that met the qualifications of Revenue Procedure 2015-20, the TPRs will continue to present significant challenges to taxpayers in the coming years.
Here are a few key takeaways following the first tax filing in which TPRs were mandated.
1. TPRs will continue to be an issue that taxpayers face annually, as they review how certain expenditures should be treated (expensed versus capitalized and depreciated). The TPRs led many taxpayers to scramble during the fourth quarter of 2014 in order to collect and analyze the information required to comply with the new laws. Many taxpayers essentially âput a Band-Aidâ on the process, making quick fixes to comply with the new standards.
Moving forward, businesses must continue to monitor how certain expenditures will need to be classified on their 2015 tax return. For instance, if a taxpayer invests in a new roof on a commercial building, the taxpayer must assess the facts and circumstances surrounding the new roof to determine if this spend should be expensed or capitalized and depreciated for tax purposes.
2. TPRs will continue to have a significant impact on certain industries. The burden of the standards can potentially fluctuate depending on a taxpayer's industry. For example, a company in the service industry may have a smaller annual burden of addressing the regulations due to the absence of many fixed assets or repairs and maintenance. On the other hand, taxpayers in capital-intensive industries, such as manufacturing and real estate, will continue to see a significant effort required to properly comply with the TPRs. Understanding the impact of the regulations on a taxpayer will likely be an ongoing process, as businesses must decide if an item is required to be capitalized and depreciated or immediately deducted.
3. TPRs will require proper internal controls related to the treatment of capital expenditures. Going forward, TPRs will need to be considered annually by taxpayers, as they will be an item scrutinized by the IRS. Taxpayers should invest in appropriate internal controls to ensure the proper treatment of expenditures. For example, updating an internal capitalization policy and coordinating responsibilities between the taxpayer and his or her CPA will be necessary to fully abide by the TPRs successfully.
Two Questions You May Want to Consider
1. What level of involvement should I expect from my CPA in complying with the TPRs? Taxpayers must understand, make adjustments, and adopt new concepts (units of property, for example) under the TPRs. Some taxpayers will make decisions on the TPRs internally, while other taxpayers will rely heavily on their CPA for guidance. Having a CPA who fully realizes the potential for tax-planning opportunities can be critical in your business' success under the new regulations.
2. What does this mean for a future IRS audit? The decision to deduct an expenditure immediately or to capitalize and depreciate an expenditure is important for taxpayers to document. The classification of a capital expenditure on a tax return is something that can be scrutinized in the event of an IRS examination.
One best practice to implement would be to document details surrounding capital expenditures, including the reason an item was capitalized and depreciated or expensed according to the TPRs. Consider creating a summary memo of the process, detailing the purpose of the capital spend and how the business decided on the appropriate treatment of an item under the new TPRs.
About the author:
Mark Baricos is a managing director at CBIZ MHM LLC and serves on the firm's National Tangible Property Regulations Task Force. Mark has 15 years of experience with planning, supervising, and coordinating comprehensive tax services for privately-held and publicly-held companies operating in multiple states and internationally. He works with many of the largest companies in Memphis, Tennessee, with a primary focus on manufacturing, distribution, and retail industries.